TO THE OFFICER IN CHARGE OF
SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION
STAFF AT EACH FEDERAL RESERVE BANK AND TO DOMESTIC
AND FOREIGN BANKING ORGANIZATIONS SUPERVISED BY THE
FEDERAL RESERVE

SUBJECT: Interagency
Advisory on the Use of the Federal Reserve's Primary
Credit Program in Effective Liquidity Management

The Board of Governors of the Federal Reserve System,
the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Office
of Thrift Supervision, and the National Credit Union
Administration (collectively, the Agencies) have
issued the attached Interagency Advisory on the
Use of the Federal Reserve's Primary Credit Program
in Effective Liquidity Management. The interagency
advisory presents information on the new Federal
Reserve primary and secondary discount window programs
and provides guidance on the appropriate use of primary
credit in an effective liquidity management program
to the directors, management, examiners and supervisors
of depository institutions.

The advisory explains that the new primary credit
program is designed to provide depository institutions
with an additional tool for managing short-term liquidity
risks through the extension of short-term credit
to eligible institutions at a rate above the target
federal funds rate. An important goal of the primary
credit program is to reduce institutions' reluctance
to use the window as a source of back-up, short-term
liquidity. Since primary credit can serve as a viable
source of back-up, short term funds, supervisors
and examiners should view the occasional use of primary
credit as appropriate and unexceptional.

The primary credit facility is only one of many tools
that institutions may utilize in managing their liquidity
risk profile. An institution's management should
ensure that the institution maintains adequate access
to a diversified array of funding sources, including
liquid assets such as high-grade investment securities
and a diversified mix of wholesale and retail borrowings.

If an institution incorporates discount window borrowings
in its contingency plans, the plans should be updated
in light of the new programs. Management also should
occasionally test the institution's ability to borrow
at the discount window to ensure that there are no
unexpected impediments or complications should such
lines need to be utilized.

Reserve Banks are asked to send a copy of this SR letter
and the interagency advisory to senior management
at domestic and foreign banking organizations supervised
by the Federal Reserve. If you have any questions,
please contact Jim Embersit, Assistant Director
(202-452-5249), or Mary Frances Monroe,
Senior Supervisory Financial Analyst (202-452-5231),
Market and Liquidity Risk Section.